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THE DEFINITIVE GUIDE TO iGAMING IN THE UNITED STATES Updated January 2017 Includes new eSports chapter Table of Contents I. INTRODUCTION II. BUSINESS OPPORTUNITIES IN iGAMING a. The Critical Role of Land-Based Casinos i. As conduits for iGaming ii. As partners with iGaming operators b. Opportunities for Overseas Operators c. Other Industry Opportunities d. Convergence e. Opportunities for Tribal Constituencies III. RECENT HISTORY OF THE LEGALITY AND ENFORCEMENT OF U.S. iGAMING IV. LEGAL iGAMING: STATE-BY-STATE V. STATES CONSIDERING iGAMING LAWS VI. iGAMING FUNDING VII. ONLINE SPORTS BETTING, FANTASY SPORTS AND LOTTERY VIII. eSPORTS IX. PREDICTIONS & TRENDS: LOOKING TOWARD 2017 X. ABOUT IFRAH LAW I. Introduction y 2010, the internet had become an indispensable part of virtually every aspect of our lives. We read newspapers, books, and magazines online instead of on paper, we shopped online B instead of visiting the mall, and we streamed movies directly from the internet rather than renting them from a video store. Also by this time, a large part of our daily interactions with other human beings occurred over the internet, through email, and social media. Yet in 2010, there was no legal internet-based, real money gaming – or iGaming – in the United States. A number of companies, largely located offshore, offered online poker and other games, but did so in a legal gray area. In 2011, the federal government announced that interstate online gaming was conducted illegally and shut down the largest internet poker websites in the U.S. Soon after, states recognized their potential to profit from the iGaming vacuum and passed laws legalizing online intrastate iGaming. In the following years, a growing number of states began permitting real-money online poker and other internet games. Some of these states have even entered into agreements allowing their players to play each other over state lines. The benefit to these states – as well as others that are considering making the jump – is clear. Legal iGaming offers the potential to increase in-state employment by requiring certain jobs and equipment to be kept within state boundaries, and states profit by collecting substantial state tax revenue and licensing fees. For states that already have brick and mortar casinos, iGaming offers opportunities to cross-market and thereby resuscitate struggling hotels and casinos with an influx of new patrons. Although revenue figures have lagged behind the optimistic predictions forecasted by the first states to implement iGaming, it is still an important source of cash for state coffers. Venture capital firms and investment banks have begun to devote time, effort, and money to the industry – a sign that financial experts share the view that iGaming, ultimately, will be successful. Internet gaming will undoubtedly be a growing fixture in the gaming industry over the coming decades. In this report, we seek to provide a comprehensive discussion of the current status of internet gaming in the United States. We begin with the topic of the business opportunities that iGaming offers. This is followed by a discussion on the legality of – and enforcement against – iGaming, including an analysis about the federal statutes that have been applied to iGaming and some of the significant milestones in federal law enforcement against the industry. We then provide detailed information regarding iGaming laws that states have passed or are considering. Next, we address how fantasy sports leagues, the “new kid on the block” of iGaming, will be viewed under state and federal law. In our newest chapter, we delve into the increasingly popular eSports arena and the myriad of legislative concerns that surround this progressive new facet of iGaming. Finally, we offer our predictions for iGaming trends in the coming year and beyond. Our hope is to provide readers with an up-to-date resource on the current status of the iGaming industry in the United States, which will be updated regularly as developments occur. 4 © 2017 Ifrah Law II. Business Opportunities in iGaming Gaming poses business opportunities for a number of participants, not only including entities involved directly with the games, but also an assortment of providers required in order to offer i the product in a manner consistent with regulatory requirements. For the most part, iGaming is structured around the sharing of revenues and the costs and benefits of marketing. a. THE CRITICAL ROLE OF LAND-BASED CASINOS While iGaming offers many opportunities for profit, the industry is more restrictive than many others. Those restrictions limit profit to some extent and arise from the regulations imposed on providers in this field. In the United States, iGaming has developed according to a model different from the way in which the industry operates in Europe and the rest of the world. A company wishing to offer iGaming cannot simply do so from the cloud; rather, iGaming is offered exclusively through contractual partnerships between the internet platform operators and existing land-based casinos already holding gaming licenses from state regulatory authorities. iGaming developed along this path as a result of a number of factors, including the political power and economic leverage wielded by land-based operators and fear on the part of land-based operators that the iGaming business would cannibalize brick and mortar revenues. These fears have been largely assuaged as the casinos have realized that the customers coming to iGaming platforms are demographically different from their land-based customers, but the model still remains. Each of the state regulatory schemes that has been enacted in the United States thus far has followed this model, requiring partnering with licensed land-based casinos. But of course there is a limited number of land-based casinos, making opportunities to offer iGaming similarly limited. And the cost of entry into the industry is fairly high – including the costs of acquiring a land-based license, the costs of acquiring a license as an iGaming provider, and the hard costs of setting up the servers in the brick and mortar locations to provide the infrastructure for the online gaming products. Generally, iGaming providers partner with the land-based casinos in contractual agreements that focus on revenue-sharing. In some cases, the iGaming provider shares its portion of the revenue with other downstream participants – for example, in those cases in which the iGaming provider does not own the actual software used in the online gaming product. Thus far, for the most part, the land-based casinos have taken a largely hands-off approach to the management of the online products, leaving it to the iGaming providers to handle those matters. On the other hand, in many cases, the entry point for consumers to use the online gaming product is via the land-based casino’s website. This offers certain advantages for land-based casinos that are already well-known and enjoy significant brand recognition. One exception to this general rule is Trump’s online gaming, which is managed by Betfair and accessed through Betfair’s website exclusively; however, that is an historical consequence of the buyout of Trump Hotel with a reservation by Trump of the exclusive right to offer iGaming under the “Trump” brand name. 6 © 2017 Ifrah Law b. OPPORTUNITIES FOR OVERSEAS OPERATORS While iGaming in the United States has attracted many overseas providers (and certainly offers them opportunities in this market), those overseas providers face some unique issues. The expense of marketing – which is substantial – has generally been laid at the feet of the iGaming providers. The hotels, which already have customer lists and loyalty programs, usually provide the contact information of their customers to their iGaming provider partners to use in marketing campaigns, but otherwise largely leave marketing (and the cost therefore) to the iGaming providers. For those who come from overseas, the responsibility for carrying the sole burden of marketing may be unusual, and the sheer cost of entry may be daunting for smaller entities. Also, as the continuing PokerStars licensing determination in New Jersey shows, providers who accepted U.S. players as customers after 2006 may face hurdles or even barriers to their entry into the U.S. state-regulated market now. c. OTHER INDUSTRY OPPORTUNITIES iGaming offers numerous opportunities for others as well. Because of regulatory requirements for security and safety, provision of online gaming also requires the involvement of banks (for payment processing) and security affiliates (for verification of age and identity), among others. In some states, some of these ancillary providers are required to be licensed by the regulatory authority, though in some states that process is less intense and less intrusive than the licensing process applicable to those entities that will be in direct contact with customers during the offering of the online gaming product. Because data privacy, cybersecurity and underage gambling are very important concerns for regulators, these ancillary providers are viewed by regulators as extremely important participants in the industry. d. CONVERGENCE In these first years of state-regulated iGaming in the United States, much business analysis has focused on “convergence” – the extent to which the success of the brick and mortar hotel and casino and the internet-based gaming products are intertwined and mutually supportive. The use of existing hotel customer bases for marketing is one way in which the land-based partners have provided support for the marketing of their iGaming partners. The hope and goal of many hotel-iGaming partnerships is that iGaming, which is attracting a customer base from different demographic groups than the hotels themselves, will attract those new customer groups to spend money at the land-based hotels and casinos. The possible means for doing this are limited only by the imagination of creative marketing professionals, but they include sponsorship of tournaments, loyalty point programs, coupon offers, and the like.

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